Saving for a Down Payment | RRSP, TFSA, and HBP

Editor’s note: This article was originally published on February 20, 2014 and was updated on January 21, 2016.

The Basics

As you consider purchasing your first home, it can be a daunting task to decide how you will be able to save for a down payment. In order to avoid the Canada Mortgage and Housing Corporation (CMHC) Loan Insurance you need to make a down payment of more than 20% of the purchase price. As reported by the REALTORS® Association of Edmonton in January 2016, the average price of a condo in Edmonton was over $248K in 2015. For a buyer, the required down payment would be over $50,000 in order to avoid a high-ratio mortgage. Keeping with this example, a minimum down payment would be 5% or $12,600. For many first-time homebuyers, if you’re currently paying some combination of rent and/or student loans, it can be a challenge to determine where these funds will come from. Thankfully, there are some options out there that can help.

In 2015 the average price of a condo in Edmonton was over $248K, that means the required downpayment would be over $50,000.

Home Buyers Plan (HBP)

The Home Buyers Plan is a government program that allows first time home buyers to access their RRSPs tax free for the purchase of a home. Some benefits and conditions of the program include:

• Maximum $25,000 withdrawal per person from RRSP for down payment
• Maximum $50,000 withdrawal per couple from RRSP for down payment
• Money withdrawn from the RRSPs is tax free
• Money has to be repaid over the next 15 years
• Money has to be in RRSP for a minimum 90 days before withdrawal to be eligible
• Money has to be withdrawn within 30 days of home purchase
• The property has to be your principal residence for one year

Basically the Home Buyers Plan allows you to use funds from your registered retirement savings (RRSPs) to fund the purchase of your first home. You are expected to pay back into your RRSPs over the following 15 years; however, the benefit of accessing the money tax free is nice.

Tax Free Savings Account (TFSA)

Introduced in 2009, a TFSA allows individuals over 18 years old to invest $5,500 per year into an account that has no tax implications. Some say that the flexibility of the TFSA makes it a superior choice for saving for not only a down payment, but funding retirement as well. There is no doubt that the TFSA is considerably more flexible than an RRSP making it an attractive savings option.

With a TFSA, interest earned is not taxable and you do not have to return the money should you decide to make a withdrawal. However, you also do not receive the tax benefits that RRSPs present.

For more on TFSAs, refer to the Tax-Free Savings Account resources page offered by Canada Revenue Agency.

Try the 52 Week Money Challenge

In 2014, we blogged about how one First Foundation staffer was able to save $13,780 in one year by following the 52-week Money Challenge. Since January and February often carry a heavier financial burden as we recover from the holiday season, the challenge accommodates this by starting small. As you progress each week your saving requirements grow. If you’re able to follow this money challenge, your savings could be deposited in a TFSA, or, if you are a first-time homebuyer, the savings could be deposited in an RRSP which you could then borrow when it’s time to purchase your home. The added bonus? Tax savings or even a tax refund that you could also use toward your down payment!

If you’ve already maxed out your RRSPs for the year, or have participated in the HBP in the past, the TFSA would be a great option for depositing your savings earned from the 52-week Money Challenge.

More Alternatives to Saving for a Down Payment

There isn’t only one option when saving for a down payment. Also consider the following options and decide what is best for your current situation.

• Flex down (borrowing your down payment using personal lines of credit etc.)
• Gifted down payments (equity gifted by family members.
• RRSP loans to start an RRSP as a pre-cursor to using the Home Buyers Plan.
• We also have an account available that pays 3% interest on TFSA saving for the next six month as a way to increase available funds. Contact us for more information.

In Sum

Obviously there is no one "best way" to save for a down payment, it has more to do with your specific situation. For instance, if you have an employer matching program for RRSPs at work, this would be a no brainer as your employer contributions would be almost like free money towards your down payment.

If you are looking for the best way to save for a down payment, feel free to contact us anytime.

We absolutely love working with people who need a plan. You certainly don't have to be ready to buy a house before giving us a call, we work with clients at every step of the process, even 2 years before pulling the trigger on a home purchase!